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Have Capital Market Anomalies Attenuated In The Recent Era Of High Liquidity And Trading Activity?, Tarun Chordia, Avanidhar Subrahmanyam, Qing Tong
Have Capital Market Anomalies Attenuated In The Recent Era Of High Liquidity And Trading Activity?, Tarun Chordia, Avanidhar Subrahmanyam, Qing Tong
Research Collection Lee Kong Chian School Of Business
We examine whether the recent regime of increased liquidity and trading activity is associated with attenuation of prominent equity return anomalies due to increased arbitrage. We find that the majority of the anomalies have attenuated and the average returns from a portfolio strategy based on prominent anomalies have approximately halved after decimalization. We provide evidence that hedge fund assets under management, short interest and aggregate share turnover have led to the decline in anomaly-based trading strategy profits in recent years. Overall, our work indicates that policies to stimulate liquidity and ameliorate trading costs improve capital market efficiency.
The Limits Of The Market-Wide Limits Of Arbitrage: Insights From The Dynamics Of 100 Anomalies, Hieiko Jacobs
The Limits Of The Market-Wide Limits Of Arbitrage: Insights From The Dynamics Of 100 Anomalies, Hieiko Jacobs
Research Collection BNP Paribas Hedge Fund Centre
Are anomalies strongest when limits of arbitrage are widely considered to be greatest? We empirically explore this theoretically deducted prediction. We first identify, categorize, and replicate 100 anomalies in the cross-section of expected equity returns. We then comprehensively study their dynamic interaction with popular proxies for time-varying market-level arbitrage conditions. Our findings reveal a surprisingly weak role of commonly employed measures of market-wide arbitrage risks and constraints. Even though this “big picture” evidence is by no means conclusive, our findings might potentially be best interpreted as supporting the growing literature which uncovers some shortcomings of the limits to arbitrage argument.